The trick to successful investing is pretty simple – just buy the stuff that makes money. Paul Mumford tells Merryn Somerset Webb how he does it.
At times like this you want your money to be looked after by a fund manager who has seen it all before – a guy who won’t be fazed by bonkers politics, inflation, unexpected interest rate rises or fast-changing industry dynamics. An old hand.
The bad news is that good fund managers make a lot of money, so they don’t tend to stick around much past 50 (better to retire to the country and run your own money). The good news is that some do stay. Enter Paul Mumford, author of a fine book called The Stock Picker (reviewed by us a few months ago), senior fund manager at Cavendish Asset Management, and, I think he won’t mind me saying, one of the UK market’s best-known old-timers.
Mumford’s City career started in 1963 (he was a stockbroker), but he began managing money post-Big Bang in 1987. He’d been specialising in smaller companies as that was where his interests lay at the time, but he didn’t want to restrict himself by size. So he focused on recovery situations and out-of-favour sectors. That put him in small companies from 1992 to 1995, large stocks from 1995 to the banking crisis, and mostly smaller ones since. That original fund is now Cavendish Opportunities and Mumford runs two others as well (see below) – a pure Aim fund and a large and mid cap one.
So what’s the common thread between the three? “Great stocks.” What makes a great stock? “A great stock is a stock you can make money out of.” Defined how? “You buy it when it’s cheap and you sell it when it’s expensive. You tend to do things that are slightly unpopular because you’re actually buying stocks that are out of favour in unfashionable areas of the market.” Would he call that value investing? Contrarian investing? He’d call it “moneymaking”.
So where are the moneymakers now? Think sterling, says Mumford. The pound is very undervalued: once Brexit is dealt with, and people see there is benefit in sterling being “detached from the euro”, it will go back to $1.50. Not tomorrow, but in five to ten years, perhaps. For now, anti-sterling sentiment spells “huge opportunities” in some of the domestic stocks. Take domestic retail. Competition and the living wage are eating into margins, and the falling pound has driven up input prices. Sounds bad.
But it means “you can pick up stocks yielding 6%-8% on single-figure price/earnings ratios” – such as Debenhams, Musgrave, and Laura Ashley. For most investors they are “over-my-dead-body stocks” – so they are too cheap, and are trading pretty well.
He particularly likes women’s fashion chain Bonmarché. Retailers hedge their currency costs forward to protect against the kinds of swings we’ve seen recently. Bonmarché is hedged to the end of 2017, so it won’t be hit hard by the falling pound. But his sector favourite is Moss Bros. Nothing particularly interesting will happen in the business this year. But the management team is good, and is coping with the living wage rise by changing the company’s bonus structure (lower bonuses, higher wages).
The traditional suit-hiring business is doing pretty well and there’s a “decent range for sale” too. Moss Bros also has £18m-odd on the balance sheet so it can afford to keep paying the dividend. That matters. If “a company is giving a decent yield and the yield is sustainable, then the shares will pay for themselves even if the share price doesn’t change”.
That said, things do go wrong in investing with surprising regularity (there are three chapters in Mumford’s book about his mistakes!). Which is why he holds more stocks in his portfolio than some of the other investors we approve of – “I like to have 70”, each being 1.5% or so of the portfolio. That way if you really have a portfolio of great stocks, you will get great performance, but if one goes horribly wrong you will only lose a penny or so in the pound. Madness, says Mumford, is letting some big stocks take up too much of a portfolio. “I don’t like sleepless nights.” Index funds in particular are “stark, raving bonkers”. You end up with far too much in stocks that can and do go horribly wrong. (Note that in 1999 British Telecom was 7.3% of the index. Now it is less than 2%.)
Buy breweries and self-storage groups
We go back to today’s unloved stocks. Take the breweries, says Mumford. Marston’s and Greene King offer low-ish ratings with “decent enough yields”. Some construction stocks are interesting – Costain and Kier Group, which has a decent property investment side. Or perhaps the likes of DGM Property, which owns property around the Marble Arch area, some of which is in the books either at cost or at a very low level. The share price is £63, but the published value of its assets is £95 – and the asset value is a “fairly conservative one”.
Generally, he isn’t mad for house building, but you always have to “be a hypocrite in this business”, so he holds Telford Homes, which develops properties in fringe areas of London that it pre-sells (mostly long-leasehold flats) out as far as 2020 – taking a non-refundable 20% deposit from buyers (mostly overseas investors). Then there are the quasi-property groups such as Lok’n Store. Self storage has an interesting dynamic. As occupancy levels rise, so do rental levels, and the properties are valued on a multiple of the rents. “Now that’s a great stock.”
Another favourite is oil and gas. Mumford started buying last year, but even after a great run it is an “incredible sector” and “there’s still further to go”. He likes Faroe Petroleum, one of the biggest operators in the Norwegian part of the North Sea, where once you have your licences (they aren’t easy to get), 80% of your drilling cost is paid back by the Norwegian government.
As a result, a few decent finds can be “transformational”. Who wants to invest in the likes of Shell and BP, where you might make 25%? You want the ten-baggers. Take oil explorer Hurricane Energy – “I managed to pick up some at 10p and the price is 53p. And that’s only in the last year.” Another one is oil and gas group EnQuest, which recently acquired assets from Shell and is bringing on production in the next year.
What you should absolutely not buy
So Mumford sees a lot of opportunities – more than most managers I talk to. What would he absolutely not buy? Any kind of gilt or loan stock offering a return below inflation. That’s “stark staring bonkers” with the oil price, and hence inflation, on the rise. Other than that, there isn’t much he dismisses out of hand. He doesn’t like financial companies in general, but is “just in the process” of buying one. He is very careful on Aim – nothing listing from overseas, nothing too small, and nothing making a loss. But that still leaves a huge range. He tends to avoid mining, because “I don’t understand commodity prices”, but even so, holds Sylvania Platinum in the Aim portfolio. The same goes for biotech.
Such a large proportion of drugs “completely fail” that the risks are just too high. I’m used, by now, to the idea that he holds something in every sector he hates – so which is it in biotech? It is Ergomed, which works for biotech firms and finances some drug development rather than being a biotech itself. It is already profitable. Another is Clinigen, which markets successful drugs and supplies products to biotech groups.
Indeed, there are “so many great stocks in the market at the moment” that the only thing that could make things better would be a nice market crash. That’s because when investors start wanting to get out and fund managers have to sell to fund their withdrawals, they don’t sell the rubbish (no buyers), says Mumford. They sell what they can sell – the better stocks. And that’s when you get “really fantastic bargains” and you can think to yourself: “Yup, this is a really great time” to be an investor.
Fact file: Paul Mumford
Paul Mumford, 72, has worked in the investment industry for more than 50 years. He started out in 1963 as an analyst for stockbroker Norris Oakley Brothers, then in 1974 went to work as a small companies expert at another stockbroker, R Nivison. Following the Big Bang reforms in the City, he moved into fund management and in February 1988 (with the FTSE 100 at 1,777.6) launched his first fund, the Glenfriars Opportunities Fund. This became the Cavendish Opportunities Fund when he joined Cavendish Asset Management on its formation in 1994.
He is still running the fund, alongside the Cavendish Aim (launched in 2005) and UK Select (launched in 2010) funds. Over the last five years, Cavendish Opportunities has returned nearly 100%, and UK Select 65%, compared with just under 60% for the UK All Companies benchmark; while Cavendish Aim has returned 111% (versus 93% for the UK Smaller Companies benchmark). His autobiography, The Stock Picker: A Financial History From The Sharp End, was published last year by Harriman House.